Tuesday, June 8, 2010

You know what's coming...

Sigh.

I find it amazing that what seems so obvious escapes the consciousness of so many.

The latest to wake up and smell the coffee are the brilliant economists at the National Bank who have come out with the insightful conclusion that the impact of rising interest rates on the residential housing sector "could be dire" in Canada.

Really? Whodathunkit?

“Though the Bank of Canada has done well to set its rate normalization process in motion, the fact remains that the stakes at play are high, with home prices and household debt at record levels relative to income,” economists Matthieu Arseneau and Yanick Desnoyers said in a report. “The residential real estate sector, which is extremely sensitive to interest rate fluctuations, could have the wind knocked out of its sails if interest rates do nothing more than normalize.”

No kidding.

And what will happen if they do more than 'normalize'?

The impact on our Country, economy and government finances is going to be severe.

Once again, I shake my head.

Arseneau and Desnoyers are right, but where was this insightful analysis when the blogosphere was initially sounding the alarm last year?

Meanwhile the Toronto Star has taken these observations to their logical conclusion and noted that the CMHC is Canada's very own ticking time bomb.

The Star article concludes exactly what has been said here for the last 18 months... that the CMHC is "a potential financial disaster lurking just over the horizon, waiting to put us into the real world of true financial crisis."

Sigh... we are so screwed.

I am reminded of events in mid 2008. The United States was spiraling into recession and our politicians steadfastly maintained we would not be effected.

As world events continue to spin wildly, we continue to believe that we will not be impacted.

We are watching a 5.9% annual decline in the M3 money supply, the deepest decline since the early 1930s banking crisis. This is a post World War II record drop in the inflation-adjusted M3 and it signals an intensifying business contraction. Many observers believe we are heading for a renewed recession and it will set the stage for a U.S. solvency crisis and severe inflation threat.

Meanwhile British Prime Minister Cameron has come out and that the UK deficit is worse than 'previously thought'. That's British for "oh sh*t".

Tempering the UK announcement is word that that the U.S. government’s total debt will risee past $13 trillion for the first time in history later this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund.

“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”

THAT, my friends, is the understatement of the year.

Just as Canada could not escape the effects of the recession which swept over the US in 2008, nor will we escape the impact of the sovereign debt crisis that is bearing down on the UK and US.

As all this plays out, you don't want to be carrying debt... especially hundreds of thousands of dollars in mortgage debt.

2 comments:

A family member in Victoria put their rental property up for sale in fall of 09 (after hours of talk with myself and life throwing them a curve ball).

They approached the people renting the basement suite (knowing the people renting main floor weren't in a position to buy) and asked them if they were interested in buying it. The renters responded saying, "Well, we would like to buy it, but we own a rental condo in Vancouver and cannot afford to sell it".

Isn't that classic Vancouver?! People in victoria, who are renting an 'ok' basement suite, also own a condo in Downtown Vancouver.

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